Sequoia and the Birth of Venture
Sequoia Capital was one of the first venture capital (VC) firms in the field. To understand Sequoia Capital, however, one must know the origin of Silicon Valley. The dawn of Silicon Valley can be traced to a group of eight employees. After leaving Shockley Semiconductor Laboratory, they began a new company known as Fairchild Semiconductor. These employees became known as the “traitorous eight.” The limited infrastructure for startups at that time led the “traitorous eight” to Sherman Fairchild, one of the large investors in International Business Machines Corporations (IBM) and owner of Fairchild Camera and Instrument. Sherman set these eight employees up as a division of Fairchild Camera and Instrument called Fairchild Semiconductor.
Don Valentine, the founder of Sequoia Capital, was born in 1933 in Yonkers, New York. Valentine’s first job was at Raytheon Technologies in California during which he attended several marketing courses at a local college. Marketing and product-market fit became the key drivers of Valentine’s strategy in later years.
After working in California for a short period of time, Valentine was recruited by Fairchild Semiconductor, where he was soon promoted to be the head of sales and marketing. Valentine immediately blew Fairchild’s previous sales out of the water. Valentine worked closely with Bob Noyce, one of the “traitorous eight” among others, developing the semiconductors that Valentine sold. By being a part of the process of creating and developing the semiconductors, Valentine “knew the future” as he put it in a later speech at Stanford. As Valentine sold the semiconductors at Fairchild, he began making small investments in the companies that were buying the semiconductors. Valentine knew the important role semiconductors would play in the future and where the market was going. Furthermore, Valentine personally knew the network of people creating and developing the latest semiconductors at Fairchild. All of the challenges and experiences Valentine faced led him to an incredible ability to understand the modern market set of marketing skills.
The aforementioned reasons led Capital Group, an investment vehicle, to recruit Valentine to make investments because of his unique insights. Valentine accepted the offer and Capital Group gave him a $5 million fund entitled Sequoia. Capital Group giving $5 million to one person to invest in a non-existent industry was risky. At the same time that Valentine was searching for places to invest the Capital Group’s fund, he wanted to start his own investment vehicle. Capital Group supported Valentine in his quest for his own fund, nevertheless, it was extremely hard to raise capital.
In 1975, after three years of tireless work, Valentine finally secured the capital for his fund. Sequoia’s first investment was $600,000 in Atari, the first and largest company in the video game industry. The very next year, Atari was acquired by Warner Communications for $28 million. This sale was an amazing 4x return for Valentine, but still less than his previously stated expected return of 20x on his investments. In 1977, Sequoia invested $150,000 in a small company called Apple, which became their biggest mistake. Valentine was forced to sell his stake in Apple for only six million dollars because the investors in that Sequoia fund needed money for tax reasons. This unfortunate situation is one of the main reasons Sequoia later only accepted money from tax-exempt institutions; they will never miss out on gains because their investors won’t need their money for ta purposes. Additionally, Valentine learned from Apple that the PC will be integral to the future. The remarkable discovery of a PC defining the future spurred Valentine to invest in all of the supporting pieces to the PC, such as disc drives, printers, and magnetic discs. The main investments in the early years of Sequoia revolved around the hardware of the future. Valentine's familiarity with the hardware world led him to invest his money here. One of Valentine’s major successes was when he invested $2.5 million in Cisco for 30% of the company. Valentine then remained on the board of Cisco until the 1990s.
By the ’90s Sequoia was steadily raising approximately $150 million every three years. Valentine had to scout out new partners considering a part of Sequoia’s VC model was that the members would be actively involved in the companies they were investing in. For this reason, Valentine needed more people to help him run the show. Since things were decided by consensus at Sequoia, Valentine wanted people as different from him as possible to expose him to a wide variety of opinions. The first partner Valentine hired to join him was Gordon Russel who specialized in biotech and healthcare. Valentine also convinced the well-known investor, Pierre Lamond, to work at Sequoia. At the time, a journalist named Michael “Mike” Moritz was looking to write a newspaper about the VC world. Valentine saw Moritz’s potential and convinced him to come work with the Sequoia team. Lastly, Doug Leone, who started his career at Hewlett Packard, was brought on to Sequoia in 1988.
In 1996, Valentine called Moritz and Leone into his office to tell them the new age of investing is beyond his expertise. Moritz and Leone got the privilege of finding out this news first, because they had the best track record, and were the future of Sequoia Capital. Valentine gave Moritz and Leone the proverbial keys to run Sequoia. Valentine created Sequoia in a way that was never founder-centric. The company always focused on the current market and its future direction. When Valentine felt Sequoia no longer needed him, he passed on the reins to Moritz and Leone.
After Valentine passed the torch to these two trusted employees, they wanted to expand into China. Although, Moritz and Leone knew that China was not their area of expertise. Following in their mentor’s footsteps, they created a new team to invest in China. That team invested in some of China’s most lucrative companies: Pinduoduo, Alibaba, Meituan, Bytedance (owns TikTok) amongst 50 or so others. Moritz and Leone worked in lockstep for about twenty years, granting them early successes with Yahoo, Google, and others. After three remarkably successful funds, Moritz and Leone faced a bad fund. While most venture capital firms would take the loss and move on, Sequoia worked with the companies they were invested in, to generate some sort of return. They persevered, allowing their investors to receive a satisfactory return. Sequoia, to this day, is one of the most successful venture capital firms of all time.